NAV on 2019/10/15
|NAV on 2019/10/14
|52 week high on 2019/08/20
|52 week low on 2019/01/04
|Total Expense Ratio on 2019/06/30
|Total Expense Ratio (performance fee) on 2019/06/30
Coronation Fund Managers Ltd.
MSCI Emerging Markets index
Head of Coronation's Emerging Markets team, Gavin has 15 years' experience as an investment analyst and portfolio manager. He has managed a range of South African equity and balanced funds and currently co-manages Coronation's Emerging Markets Fund. Prior to joining Coronation in 1999, Gavin qualified as a chartered accountant with Ernst & Young and worked for Merrill Lynch and CSFB in London.
Suhail joined Coronation's Emerging Markets team in 2007 as a research analyst and has 10 years' investment experience. He was formerly with Futuregrowth Asset Management where he was a portfolio manager within the fixed interest team specialising in structured credit and developmental equity investment funds. Prior to this he was a research analyst at Oasis Asset Management.
Glbl Emerging Markets Flex [ZAR] comment - Mar 19
The fund had a very good quarter, returning 21.6% compared to the MSCI Emerging Markets Index return of 11% (both in rands) and in doing so outperformed the market by 10.6%. This made it the fund’s best quarter of outperformance since inception over 11 years ago. Its previous best quarter was the one to end September 2008 (9.4% outperformance) in the midst of the 2008 GFC.
During the quarter to end March 2019 there were a number of stocks that contributed positively, with all of the 15 largest positive stock contributors appreciating by more than c. 20% in USD. At the top of the list was Wuliangye Yibin (+92%, 1.8% contribution), New Oriental Education (+62%, 1.2% contribution) and Yes Bank (+53%, 0.9% contribution) followed by British American Tobacco (+29%, 0.8% contribution), Ctrip (+60%, 0.7% contribution), JD.com (+36%, 0.7% contribution) and Philip Morris (+34%, 0.6% contribution). A number of these stocks were poor performers in 2018 (specifically in the last few months of the year) and so the fund’s strong performance to date in 2019 is partly a reversal of a poor 2018. JD.com, Yes Bank, British American Tobacco, Philip Morris and Ctrip would all fall into this category. In addition, a few of the new buys in late 2018 were strong performers, most notably Wuliangye Yibin and New Oriental Education. Lastly, a number of long-held positions contributed positively, including Airbus (+38%, 0.6% contribution), Ping An Insurance (+28%, 0.4% contribution) and 58.com (+16%, 0.2% contribution). At the same time there were few large negative contributors with only one detractor of more than 0.5% (Alibaba’s -0.6% detraction). Since inception over 11 years ago the fund has outperformed the market by 1.7% p.a.
There were 5 new buys during the quarter. The 2 largest new buys were that of Jiangsu Yanghe Brewery (1.6% position) and LVMH (1.7% position). The 3 other buys were small: a 0.9% position in NetEase (#2 online gaming company in China after Tencent), a 0.5% position in BM&F Bovespa (Brazil’s dominant vertically integrated multi-asset [equity, bonds, derivatives] exchange) and a 0.4% position in Eastern Tobacco (Egypt’s monopoly cigarette manufacturer). In total, the 5 new buys represent 5.1% of the fund. During the quarter, we sold China’s #1 search engine, Baidu (a 1.5% position at the start of the year) due to increasing concerns about the core search business as well as the uncertain future return from the numerous other areas where the group is investing significant capital. In terms of other portfolio activity, we reduced the positions in New Oriental Education, Ctrip, Noah, Li-Ning and Adidas (all on strong share price performance and resultant less upside to our estimate of fair value) as well as Indiabulls (largely due to a reduction in our fair value and a less attractive risk/return profile). From a buying point of view, most of the activity was in the 5 aforementioned new buys but we also added to the existing positions in HDFC Bank and Pão de Açúcar.
Jiangsu Yanghe Brewery is the largest premium brand baijiu (the dominant white spirit in China) company, in contrast to the main ultra-premium (very high end) baijiu companies Kweichow Moutai (not owned in the fund) and Wuliangye Yibin (a 3.3% position in the fund). We bought a position in Wuliangye Yibin late last year and subsequently continued to do additional work on the industry, including a week’s trip to China solely focused on the Baijiu industry which led us to Jiangsu Yanghe.
Over the past decade, Jiangsu Yanghe have grown sales by 27% p.a., making them the fastest growing baijiu company over this period. Both net profit and free cash flow have grown by 35% p.a. over the past 10 years and today the company generates over $ 1b of free cash flow. The company is a beneficiary of the premiumisation of baijiu (their main premium brand ‘Dream Blue’ series has gone from being 2% of sales a decade ago to contributing over 20% of sales today) and we expect this to continue, together with further expansion to regions outside of their home base, Jiangsu (which today still contributes 53% of sales). A unique feature of Jiangsu Yanghe that also attracts us is the fact that management own c. 21% of the company. Just like Kweichow Moutai and Wuliangye Yibin, the financial metrics of Jiangsu Yanghe are impressive with operating margins of c. 45%, return on capital of c. 20% and high free cash flow conversion (over 100% of net profit in the past 3 years has been converted into free cash flow). The share trades on c. 18.5x forward earnings with a 3% dividend yield, which we believe is attractive given its long-term prospects.
The other new buy of note was a 1.7% position in LVMH, which we have covered for several years and have owned in the Strategy in the past. LVMH (Louis Vuitton Moet Hennessy) is the largest global luxury goods company and the owner of the Louis Vuitton brand (c. 50% of group profits) and many other global brands including Moët & Chandon, Hennessy, Christian Dior, Fendi, Bulgari and Tag Heuer. Over 40% of sales come from emerging markets and the Chinese consumer alone (purchasing at home as well as while travelling) is responsible for well over 50% of incremental growth.
LVMH has an enviable track record (over the past 20 years EPS has compounded at c. 12% p.a.) and today is well placed to be a key beneficiary of the growing emerging market middle and upper class and the wealth effect. The barriers to entry possessed by the true global luxury brands (Hermes, Louis Vuitton and Gucci) are amongst the highest in any industry in our view: in the case of Louis Vuitton, a 150-year history and investment in the brand for a start. The resilience (of both the topline and profitability) of the Louis Vuitton brand in particular in tough economic periods is also unparalleled: in 2009 (post the GFC) sales of the Fashion & Leather division (with Louis Vuitton making up the lion’s share of this division) of LVMH grew by 2% and EBIT grew by 3%. In 2002 (post September 11th) the Fashion & Leather goods division experienced 16% sales growth (and this after double-digit sales growth in 2001 as well) and 5% EBIT growth. The fund bought LVMH on c. 20x forward earnings and a 2% dividend yield, which we think is attractive for what we would consider to be one of the best businesses in the world.
Members of the Global Emerging Markets team continue to travel extensively to enhance our understanding of the businesses we own in the fund, their competitors and the countries in which they operate, as well as to find potential new ideas. In the first quarter, there were 2 trips to China and 2 to India. The coming months will see a further trip to China as well as one to Brazil. The fund’s weighted average upside to fair value at the end of March was c. 40%, which we feel is compelling. We would also consider the overall quality of the stocks held in fund currently to be above average when compared with other points in the fund’s 11-year history.
The investment objective of the portfolio is long-term capital appreciation, achieved with lower long-term volatility than available from investing in relevant equity market indices.
In order to achieve this objective, the portfolio will primarily invest in equity securities of companies based in developing countries or in equity securities of any other company regardless of where it is based, if the manager determines that a significant portion of the company's assets or revenues (generally 20% or more) is attributable to developing countries. In addition, the portfolio may invest in non-equity securities of similar corporate and government issuers. The portfolio may also hold other non-equity securities, assets in liquid form and appropriate financial instruments.
The portfolio will, under normal market conditions, maintain an equity bias, but no limits are placed on the asset class composition of its portfolio.
The limit on offshore investments will be in accordance with the requirements for foreign portfolios as per the ACI Code of Practice for Fund Classification.
In determining whether a country is an appropriate developing market for inclusion in the investment universe of the portfolio, the manager will consider such factors as the country's per capita gross domestic product, the percentage of the country's economy that is industrialised, market capital as a percentage of gross domestic product, the overall regulatory environment, the presence of government regulation limiting or banning foreign ownership, and restrictions on repatriation of initial capital, dividends, interest and/or capital gains. Developing countries in which the portfolio may invest currently include, but are not limited to, Argentina, Brazil, Chile, China, Colombia, Croatia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, South-Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The portfolio will be actively managed and relies on the professional judgment of the investment manager to make decisions about the portfolio's investments, both in terms of stock selection and asset allocation. The basic equity investment philosophy of the manager is to seek to invest in attractively valued companies that, in its opinion, represent above-average long-term investment opportunities. The manager believes that an important way to accomplish this is through fundamental analysis, which may include meeting with company executives and employees, suppliers, customers and competitors. Securities may be sold when the manager believes that they no longer represent relatively attractive investment opportunities in the light of the investment objective of the portfolio.
The manager will be permitted to invest on behalf of the portfolio in offshore investments as legislation permits.
Investments are not restricted to South Africa, but non-equity securities in the currency of a country, other than South Africa, may only be included in this portfolio if it complies with the Registrar's conditions and limits for inclusion of non-equity securities in a portfolio.
The portfolio may also include participatory interests or any other form of participation in portfolios of collective investment schemes or other similar schemes. Where the aforementioned schemes are operated in territories other than South Africa, participatory interests or any other form of participation in these schemes will be included in the portfolio only where the regulatory environment is to the satisfaction of the manager and trustee of a sufficient standard to provide investor protection at least equivalent to that in South Africa.
Nothing in this supplemental deed shall preclude the manager from varying the ratios of securities, to maximise capital growth and investment potential in a changing economic environment or market conditions or to meet the requirements, if applicable, of any exchange in terms of legislation and from retaining cash or placing cash on deposit in terms of the deed and this supplemental deed; provided that the manager shall ensure that the aggregate value of the assets comprising the portfolio shall consist of securities and assets in liquid form of the aggregate value required from time to time by the Act.
For the purposes of the portfolio the manager shall reserve the right to close the portfolio to new investors. This will be done in order to be able to manage the portfolio in accordance with its mandate. This critical size shall be determined from time to time by the manager.